1. Business Entities In General Flashcards
- A domestic LLC with at least two members that does not file Form 8832 is automatically classified as _____ for federal income tax purposes.
A. An S Cororation.
B. A partnership.
C. A qualified joint venture.
D. A personal service corporation.
The answer is B. A domestic LLC with at least two members that does not file Form 8832 is classified as a partnership for federal income tax purposes.
- Which of the following organization does not require an EIN?
A. An estate.
B. A C corporation
C. Nonprofit organization.
D. A sole proprietorship with no employees.
The answer is D. A sole proprietorship without employees does not require an EIN. The other choices listed all require an EIN.
- A sole proprietor will be required to obtain a new EIN in which of the following instances?
A. The sole proprietor is required to file excise tax returns.
B. The sole proprietor changes the name of his business.
C. The sole proprietor changes location.
D. The sole proprietor operates multiple locations.
The answer is A. A sole proprietor who is required to file excise tax returns (or employment tax returns) must obtain an EIN. A sole proprietorship is not required to obtain a new EIN when it changes location or its business name. A sole proprietor may operate many different businesses using the same EIN, so long as the businesses are also sole proprietorships.
- In which of the following instances will a partnership not be required to obtain a new EIN?
A. The partners decide to incorporate.
B. The partnership is taken over by one of the partners and is subsequently operated as a sole proprietorship.
C. The general partner ends the old partnership and begins a new one.
D. The partnership adds other business locations.
The answer is D. A partnership is not required to obtain a new EIN simply to add business locations. In all of the other choices listed, the entity would need to obtain a new EIN.
- Which of the following entities is considered separate from its shareholders or owners?
A. A partnership.
B. A C corporation.
C. A sole proprietorship.
D. An LLC.
The answer is B. A C corporation is considered an entity separate from its shareholders.
- A sole proprietor may not be required to file Schedule SE if his net profit for 2013 was ____.
A. Less than $400.
B. $400 or more.
C. Less than $5,000 but more than $400.
D. More than $5,000.
The answer is A. If the net profit was less than $400, a taxpayer should enter the profit on line 12 of Form 1040 and attach Schedule C to the return. Schedule SE is not required is not required unless it was a profit of $400 or more.
- Don and Selma are married, and they run a small pet grooming business together. They would like to treat their business as a qualified joint venture. Which of the following is true?
A. Don and Selma may choose to report their qualified joint venture as a sole proprietorship on two separate Schedules C, so long as they file jointly.
D. Don and Selma may choose to report their qualified joint venture as a sole proprietorship on two separate C, so long as they file separate tax returns.
C. Don and Selma must file a partnership tax return for their business activity.
D. Don and Selma must file a single Schedule C, listing Don as the sole proprietor one year and Selma as the sole proprietor the next year.
The answer is A. Don and Selma may choose to report their qualified joint venture as a sole proprietorship on two separate Schedules C, so long as they file jointly. This option is only available to married taxpayers who file jointly.
- Julian is a self-employed and has a small business selling used books. The gross income from his business is $20,000 and his business expenses total $9,500. Which schedule must Julian complete to report his business income and expenses?
A. Schedule F.
B. Schedule C.
C. Schedule D.
D. Schedule A.
The answer is B. Julian must complete Schedule C to report his business income and expenses.
- Mandy and her friend, Tammy, work together, making beaded necklaces and selling them at craft shows. They run their business professionally and jointly, always attempting to make a profit, but they do not have any type of formal business agreement. They share with each other the profits or losses of the business. The made $24,900 in 2012 from selling necklaces, and they had $1,900 in expenses. Where and how is the correct way for Mandy and Tammy to report their income?
A. Split the income and report the profits as “other income” on each taxpayer’s individual Forms 1040.
B. Each must report her own income and expenses on Schedule C.
C. Mandy and Tammy should calculate income and subtract expenses, and then report the net amount as “other income” on each individual Form 1040.
D. Mandy and Tammy are working as a partnership and should report their income on Form 1065.
The answer is D. Mandy and Tammy are working as a partnership and should report their income on Form 1065, U.S. Return of Partnership Income. Related expenses as deductible, and they are reported as deductions. Each partner would then receive a Schedule K-1 to report their individual items of the expenses and income on their From 1040.
- A personal service corporation is always taxed at a ___ rate.
A. 15%
B. 28%
C. 35%
D. 39.6%
The answer is C. A personal service corporation is created for the purpose of providing personal services to individuals or groups. Personal service corporations not eligible for graduated tax rates, like other C corporations. Personal service corporation pay a 35% flat rate on their taxable income.
- Catherine is self-employed and would like to use the simplest form available to report her business income and loss. Which of the following expenses would prevent Catherine from using Schedule C-EZ?
A. Auto expenses related to his business activity.
B. Interest paid on business loans.
C. Legal and professional services and fees.
D. Expenses for business use of his home.
The answer is D. Taxpayers cannot use Schedule C-EZ if they deduct expenses for business use of their home. If the taxpayer plans to take a home office deduction, she must use Schedule C.
- All of the statements are true about the following business entities except:
A. S and C corporations may have an unlimited number of shareholders.
B. An LLC typically provides the liability protection of a corporation but the tax benefits of a partnership.
C. “Pass through” entities include LLCs, LLPs, S corporations, and partnerships.
D. A sole proprietorship bears all the liabilities and risks of a business.
The answer is A. Only a C corporation may have an unlimited number of shareholders. An S corporation is limited to no more than 100 shareholders.
- Which of the following is considered a drawback of the C corporation entity?
A. It may have may different shareholders.
B. It may have investors who are nonresident aliens.
C. Profits are subject to double taxation, once at the corporation level and again at the shareholder level when distributed as dividends.
D. It is run by a board of directors.
The answer is C. Corporations are subject to double taxation. The other statements are facts about C corporations but are not considered drawback.
